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Commerce and Content Deserve Attention

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Commerce and Content Deserve Attention NAVER (035420 KS ) Commerce and content deserve attention 4Q17 review: Above-consensus revenue, below-consensus OP, resuming Internet share repurchasing NAVER’s consolidated revenue beat the consensus, but operating profit missed. Results Comment January 26, 2018 Positives: The business platform segment, which includes the search ad business (NAVER’s traditional area of strength), was stronger than expected, with revenue grow ing 17% YoY on the successful stabilization of the shopping search ad service (launched in November 2016), the introduction of image search, and an upgraded product recommendation feature. IT platform revenue surged 70% YoY, supported by (Maintain) Buy the growing use of NAVER Pay. Target Price (12M, W) 1,200,000 Negatives: Cost increases had a notable impact. For the parent company, expenses related to agents and partners increased more than expected. We believe news content-related fees increased starting in 4Q17, with the introduction of a news Share Price (01/25/18, W) 913,000 chann el feature on the NAVER mobile app main page. The sharp QoQ increase in operating expenses in the LINE/other platform segment weighed on consolidated Expected Return 31% operating profit. More favorable shareholder policy: NAVER announced a 2017 dividend per share of OP (17F, Wbn) 1,179 W1,446—higher than our previous estimate of W1,200—and a share buyback plan Consensus OP (17F, Wbn) 1,208 worth W119bn, resuming share repurchasing after a one-year hiatus. EPS Growth (17F, %) 3.1 Internet platform business strategy focused on commerce and content Market EPS Growth (17F, %) 45.7 In their effort to secure user traffic and develop sustainable growth models, global P/E (17F, x) 37.1 internet companies have adopted a strategic focus on commerce and content. Market P/E (17F, x) 10.4 Commerce: Advertising is the key revenue source for the internet platform business. KOSPI 2,562.23 However, in the domestic ad market, close to 40% of ad expendi tures in 2017 went toward Market Cap (Wbn) 30,095 online advertising, and growth is slowing. In contrast, online still accounts for less than 20% Shares Outstanding (mn) 33 of the domestic retail market, implying strong growth potential. NAVER is enhancing its Free Float (%) 78.3 commerce business; the company plans to rebran d Store Farm (platform for small businesses) as Smart Store and introduce additional features, and recently improved Foreign Ownership (%) 59.5 features (i.e., search nearby, booking) to the already-upgraded NAVER Map mobile app. In Beta (12M) 0.66 addition, voice-activated commerce is being introduced to AI speakers, and LINE is also 52-Week Low 720,000 expanding its shopping and fintech businesses through LINE Pay. 52-Week High 960,000 Content: Internet firms traditionally generate revenue not from users directly, but by (%) 1M 6M 12M charging advertisers at rates based on their user bases. Now, though, content is coming Absolute 5.9 9.1 19.7 into greater focus as a way to charge users directly through subscription fees. Key Relative 0.9 3.9 -3.5 examples include Netflix (video on-demand streaming service; NFLX NASDAQ, CP: US$269.70) and LOEN Entertainment (online music service provider; 016170 KQ, CP: 130 NAVER KOSPI W113,100). NAVER has decided to make equity investments in global content platforms, 120 such as NAVER Webtoon and WAV Media. 110 100 Maintain Buy and TP of W1,200,000 90 We remain optimistic on NAVER, given notable revenue growth at its core business 80 plat form segment. We expect NAVER to gain further growth momentum by enhancing 1.17 5.17 9.17 1.18 its commerce and content services. We maintain our Buy call and target price of W1,200,000. Mirae Asset Daewoo Co., Ltd. [ Internet/Game/Advertising ] FY (12) 12/14 12/15 12/16 12/17F 12/18F 12/19F Revenue (Wbn) 2,758 3,254 4,023 4,679 5,461 6,297 Jee -hyun Moon +822 -3774 -1640 OP (Wbn) 758 830 1,102 1,179 1,431 1,747 [email protected] OP margin (%) 27.5 25.5 27.4 25.2 26.2 27.7 NP (Wbn) 454 519 749 773 996 1,212 EPS (W) 13,787 15,737 22,732 23,436 30,204 36,768 ROE (%) 27.8 26.5 26.2 18.5 19.0 19.3 P/E (x) 51.6 41.8 34.1 37.1 30.2 24.8 P/B (x) 8.7 6.8 5.2 4.8 4.4 3.7 Dividend yield (%) 0.1 0.2 0.1 0.2 0.2 0.2 Note: All figures are based on consolidated K-IFRS; NP refers to net profit attributable to controlling interests Source: Company data, Mirae Asset Daewoo Research estimates January 26, 2018 NAVER Earnings forecasts Table 1. 4Q17 review (Wbn, %) 4Q17P Growth 4Q16 3Q17 Mirae Asset Preliminary Consensus YoY QoQ Daewoo Revenue 1,085 1,201 1,266 1,279 1,249 16.7 5.4 Operating profit 290 312 291 333 320 0.3 -6.8 OP margin (%) 26.7 26.0 23.0 26.1 25.7 Net profit 183 216 172 229 231 -6.2 -20.3 Note: All figures are based on consolidated K-IFRS; net profit is attributable to controlling and non-controlling interests Source: Company data, FnGuide, Mirae Asset Daewoo Research estimates Table 2. Quarterly and annual earnings and forecasts (Wbn, %) 1Q17 2Q17 3Q17 4Q17P 1Q18F 2Q18F 3Q18F 4Q18F 2016 2017P 2018F Revenue 1,082 1,130 1,201 1,266 1,250 1,326 1,392 1,494 4,023 4,679 5,461 Ads 100 118 114 130 109 131 126 142 400 461 507 Business platform 510 521 549 574 581 604 631 660 1,866 2,153 2,476 IT platform 43 49 59 66 74 84 96 106 121 218 359 Content services 24 24 27 27 27 27 28 29 103 102 112 LINE and other platforms 406 418 453 469 459 480 511 556 1,534 1,745 2,006 Operating profit 291 285 312 291 315 338 387 390 1,102 1,179 1,431 OP margin 26.9 25.2 26.0 23.0 25.2 25.5 27.8 26.1 27.4 25.2 26.2 Net profit 211 171 216 172 222 240 265 266 759 770 993 Net margin 19.5 15.2 18.0 13.6 17.8 18.1 19.1 17.8 18.9 16.5 18.2 YoY Revenue 15.5 14.4 18.5 16.7 15.5 17.4 15.9 18.0 23.6 16.3 16.7 Ads 22.3 21.8 16.1 5.4 9.0 11.0 10.0 9.9 15.4 10.0 Business platform 13.3 12.6 18.7 16.9 14.0 16.0 15.0 15.0 15.4 15.0 IT platform 92.0 75.8 90.3 70.3 70.0 70.0 63.0 59.8 80.7 65.0 Content services -23.7 -10.9 18.7 20.0 16.0 11.0 5.0 8.8 -1.6 10.0 LINE and other platforms 15.1 12.0 13.4 14.5 13.0 15.0 13.0 18.7 13.8 15.0 Operating profit 13.2 4.6 10.6 0.3 8.4 18.5 24.0 34.1 32.7 7.0 21.3 Net profit 27.8 -19.6 9.0 -6.2 5.2 39.8 22.9 54.8 46.8 1.5 28.9 Notes: All figures are based on consolidated K-IFRS; revenue was reclassified into five segments: ads, business platform, IT platform, content services, and LINE and other platforms; new classification only applies from 2017; ads include general and shopping display ads and video ads; business platform includes general and shopping search ads; IT platform includes NAVER Pay, IT services, and cloud services; content services include music, webtoon, and V Live; LINE and other platforms include LINE, Camp Mobile, and Snow; net profit is attributable to controlling and non-controlling interests Source: Company data, Mirae Asset Daewoo Research estimates Table 3. Earnings forecast revisions (Wbn, W, %) Previous Revised % chg. Notes 18F 19F 18F 19F 18F 19F - Revised business platform and IT platform upwards ; Revenue 5,455 6,270 5,461 6,297 0.1 0.4 revised ad estimates down wards - Revised agency and partner expense estimates Operating profit 1,548 1,833 1,431 1,747 -7.6 -4.7 upwards; revised LINE and other platforms expense estimates upwards Net profit 1,097 1,292 993 1,208 -9.5 -6.5 - Revised corporate tax rate estimates upwards EPS (W) 33,072 38,950 30,204 36,768 -8.7 -5.6 OP margin 28.4 29.2 26.2 27.7 Net margin 20.1 20.6 18.2 19.2 Notes: Net profit is attributable to controlling and non-controlling interests; EPS is attributable to controlling interests Source: Mirae Asset Daewoo Research estimates Mirae Asset Daewoo Research 2 January 26, 2018 NAVER NAVER’s business strategy Figure 1. Internet platform business strategy focused on commerce and content Strategy인터넷 on플랫폼 internet 사업 platform 전략 Online offline additional Indirect charge(Ad) 온라인 → 오프라인 추가 침투 간접 과금(광고) → 직접 과금(구독) 확대 penetration direct charge(subscription) expansion Improvement커머스 of commerce 강화 Investment콘텐츠 투자 in contents Source: Mirae Asset Daewoo Research Figure 2. NAVER is enhancing its commerce business: Rebranding Store Farm as Smart Store and introducing additional features to NAVER Map mobile app. Notes: On left, search function on Smart Store (platform for small business); on right, search nearby on NAVER Map mobile app Source: Company data, Mirae Asset Daewoo Research Figure 3.
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